How do leadership styles influence employee engagement and performance in SMEs?

Effective leadership is crucial for small and medium-sized enterprises (SMEs), which significantly contribute to economic growth and employment in developing economies. In Malawi, where SMEs face resource constraints and high turnover, understanding how leadership styles shape employee engagement and performance is especially vital. However, the mediating role of employee engagement in the relationship between diverse leadership styles and performance outcomes remains under-examined in Malawian SMEs. This study, therefore, investigates how transformational, democratic, and autocratic leadership styles influence engagement and, in turn, employee performance in this context. Using a cross-sectional survey design, data were collected from 231 employees of various private SMEs, with subsequent analysis using structural equation modeling to explore direct and indirect effects. The results indicate that charismatic leadership had the strongest positive impact on both employee engagement and performance, followed by democratic and autocratic leadership styles. Charismatic leadership was particularly effective in fostering an emotionally engaging work environment that promoted both higher performance and motivation. Democratic leadership also significantly enhanced engagement and performance by fostering inclusivity in decision-making processes. Interestingly, autocratic leadership, although traditionally perceived as limiting autonomy, has been found to positively impact employee performance by providing structure and clarity. Employee engagement was found to mediate the relationship between all three leadership styles and employee performance, emphasising its critical role in translating effective leadership into productive outcomes. The study concludes that adaptive leadership styles, tailored to specific organisational contexts, can significantly enhance employee engagement and performance, providing actionable insights for leaders in Malawi’s SME sector.